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Finance at Les Maisonettes


Les Maisonettes is growing so there will be effects on ... of Les Maisonnettes' ... sources of finance would you recommend for Les maisonettes? ... – PowerPoint PPT presentation

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Title: Finance at Les Maisonettes

Finance at Les Maisonettes
Financial issues to revise
  • Downward pressure on profit margins
  • The concerns highlighted in the balance sheet
  • Line 152 Sophie is considering applying for a
    bank loan and knows she can do so with a good
    interest rate.
  • She needs to prepare a business plan and consider
    her budget for the new holiday packages (line 91)

Sources of Finance
  • Sophie already took out a bank loan initially at
    the start to fund the new venture Les
    Maisonettes - 300,000 to be paid back in 2026.
    (Line 15)
  • In 2004 conversion from sole trader to LTD.
  • The classes are providing a large source of
    income for Sophie. But she had to take out an
    additional 5 year bank loan of 15,000 for
    equipment and start up costs.
  • Share capital see balance sheet

  • Using the following formula calculate LMs
    gearing ratio (see appendix four)
  • Loan capital/capital employed 100

  • 43.1 for 2005
  • 34.4 for 2008
  • Using the Raffo book what does this tell you
    about its gearing level?

Non-Financial factors
Non-Financial factors
Non-Financial factors
Non-Financial factors
Dont forget
  • Les Maisonettes is growing so there will be
    effects on costs and profit margins as this
    business grows.

The 4 options
  • Study each option and consider its impact on
    Sophies financial situation.
  • Answer this question
  • Using appropriate financial ratios, analyse the
    profitability, liquidity and activity of LM.

The 4 options
  • Overall, Sophie is pleased with her small
    business and the success. But she is concerned
    about its future direction and potential market
  • She consulted with her parents, her bank manager
    and her employees and identified four options.

Option One
  • Retain the present focus of her business but
    improve operations and profitability.
  • Impact on Finance?

Impact of option One on finance
  • v This will improve cost control it will allow
    her to reduce her costs overtime.
  • vImproved marketing will lead to increased
  • vCreating a more flexible workforce will reduce
    her costs and will allow her to be more
  • v This will improve profitability of LM.

Option Two
  • Develop an education centre to promote the ideals
    of sustainable tourism and fulfil the objectives
    of the AFE.
  • This means modifying existing accommodation,
    cutting outdoor activities, converting one barn
    to an education centre and restaurant operations
    will be restricted to guests at LM.

Impact of option Two on Finance
  • v This will support her move for eco-tourism so
    may attract eco-tourists to her increased
  • v She can now consider marketing to the 18-30
    group of eco-tourists she wanted to target.
  • v Cost savings by being more energy efficient and
    carbon neutral.
  • X This will cost money to implement.
  • X Cutting outdoor activities means loss of
    revenue, as they are a good source of income.
  • X Restricting restaurant operations to guests
    will reduce their potential customers so loss
    of revenue.

Option Three
  • Reposition LM as a luxurious eco-tourist retreat,
    develop a new USP and targeting higher income
    market segment.
  • High quality locally sourced produce will be
    offered and a range of services such as saunas
  • Impact on Finance?

Impact of Option Three on Finance
  • v Targeting high income segment will bring in
    more revenue. This move could make LM very
  • v The services will add an extra source of
  • v The quality will be a big focus and so will
    improve its image increased revenue.
  • X She will need substantial investment to upgrade
    and expand existing facilities.
  • X She will need to invest a great deal into
    recruiting and training staff, so her costs will
  • X This move could increase her gearing, which is
    currently low, but an increase could mean more
    interest payments for her. This will not make her
    very competitive.

Option Four
  • Sell the whole business to a timeshare operator
    who will redevelop the business.
  • Money goes to her parents retirement and some
    will go towards renovating the shop.
  • This means she loses control and ownership of LM.


Ratio Analysis
  • Ratios are used to interpret financial accounts.
  • Ratio Analysis can be used to assess the
    financial performance of a business.
  • Ratios can be used to analyse three separate
    issues on the operations of a business
  • Performance which compasses profitability and
  • Liquidity which refers to the ability of the
    business to generate cash for operating the
    business as and when required
  • Shareholder which concerns the variables that
    just the shareholders are likely to be interested

Q What are the advantages and disadvantages of
using ratio analysis?
  • The main advantages of ratio analysis will be
  • You will be able to look at trends
  • Ratios can be used to forecast and plan,
    summarise data, to identify problems before they
    become acute and to assess performance.
  • You can do an inter-firm comparison
  • You can see and analyse trends
  • You can make future predictions based on your
  • You can find areas with high problems and try to
    find ways to solve them

Disadvantages of Ratios
  • However, ratios should be used with caution.
    Ratio analysis does not provide a complete means
    of assessing a companys financial performance.
    There are problems with using ratios. The main
    disadvantages of ratio analysis are
  • They only highlight the problem but not provide a
  • Based on historical information and does not take
    into account positive factors within a business
    such as location, quality of staff etc. all of
    which can affect performance.
  • Ratios do not take many factors into
  • They do not measure non-monetary factors.
  • When making comparisons between ratios overtime,
    it is necessary to take into account the
  • Inflation
  • Any changes in accounting procedures
  • Changes in the business activities of the firm
  • Changes in general business conditions and the
    economic environment.

Profitability Ratios
  • These ratios focus on the firms profit.
  • We will look at profit in relation to the value
    of sales revenue.
  • GPM known as mark-up. This shows the gross
    profit made on sales turnover.
  • NPM helps to measure how well a business covers
    its overheads. If the difference between the
    gross profit and net profit is small, then
    overheads are low.
  • ROCE an important ratio. It tells what returns
    the firm has made on the resources made.

Ratios to Calculate - Profitability
Profitability Ratios
Analysis of Les Maisonnettes profitability
  • The level of profitability has reduced at LM.
  • There is a large difference between the GPM and
    NPM, showing the difficulties Sophie is facing
    with controlling overheads.
  • A reduced NPM is not a good sign, showing she has
    less profit to distribute to shareholders and to
    reinvest in the business.
  • The drop in ROCE does not show LM to be a safe

Analysis of Les Maisonnettes profitability
  • Her overheads are clearly not being spread over a
    greater level of sales.
  • She is not benefiting from economies of scale.
    She needs to improve productivity and lower
  • The ROCE has decreased, this means that sales
    growth has been slower than the rise in capital.
  • The ROCE will drop due to reduced gross and net
  • It seems that LM has poor cost control in terms
    of direct costs.

Causes of LMs declining profitability
  • It could be because she has only relied on word
    of mouth promotion and she needs to alter her
    marketing strategy.
  • The costs of the activities are high. (Her
    expenses increased by 8000 euros in 3 years (see
    appendix 3).
  • Sales declined and cost of sales increased
    (appendix 3)
  • She was charging the same amount all year and not
    taking advantage of peak season.
  • Competition (Sanctuary) and other external
    factors such as the housing market, weather
  • Health and safety regulations meant increased
    costs for her.
  • No business website not taking advantage of
    online bookings.

How can profitability improve?
  • Improve her marketing strategy to increase sales
    revenue. Strategies such as sales promotion may
    help to boost sales.
  • Reduce costs such as labour costs (but this may
    impact on morale and productivity customer
  • Reduce indirect costs overheads - without
    damaging effects to the firm.

Liquidity Ratios
  • Liquidity ratios measure how assets of a business
    can be converted into cash.
  • A business must make sure it has enough liquid
    assets to pay any immediate bills that arise.
  • These ratios are concerned with the short-term
    financial health of the business.
  • They are concerned with the firms working
    capital and whether or not it is being managed
  • Too much and it may not be making the most
    efficient use of its financial resources.

Liquidity Ratios to Calculate
Liquidity Ratios - Calculations
Analysis of LMs Liquidity
  • It is generally accepted that a current ratio of
    1.5 to 2.0 is desirable this will allow for a
    safety margin.
  • In 2005, LMs current ratio was in a comfortable
    position at 1.751. However, in 2008, it had
    declined to 0.55, showing insufficient working
    capital. This means that as a result of the ratio
    being below 11, the short term debts of the
    business are greater than its liquid assets,
    which is not a good position to be in.

Analysis of LMs Liquidity
  • This means that LM does not have enough working
    capital it could be over-borrowing or over
  • As a general rule, the ATR should be at least
    11. This means that, in 2008, LMs ratio fell to
    0.221, and this is not a good sign. This shows
    that Sophie may be experiencing working capital
    problems, and if this continues, she could face a
    liquidity crisis.
  • ATR shows that she could be unable to cover
    short-term debts

Solutions to LMs liquidity problems
  • Increase its current assets relative to its
    current liabilities. OR
  • Reduce its current liabilities relative to its
    current assets.
  • In LMs case, it is her short term borrowing that
    has increased drastically by 15,000 Euros and
    this will have to reduce in order to improve
  • She should also consider reducing short term

Efficiency Ratios
  • Also called activity ratios.
  • These are used to measure how effectively a
    business employs its resources.
  • They look at how well a firms financial
    resources are being used.

Efficiency (Activity) Ratios
Efficiency Ratios - Calculations
Summary of LMs Efficiency
  • Stock turnover has reduced, which is not a good
    sign for LM. This means less stock is sold and
    less profit generated. Sophie is not benefiting
    from purchasing economies of scale.
  • LMs debtors days ratio is low, which is good,
    but increasing. This means that it takes upto 4
    days for debtors to pay. But too low a ratio is
    not good either, as customers may seek other
    suppliers if the credit period given to them is
    uncompetitive. It could also suggest that there
    are not enough firms buying on credit. Good
    credit control should be within 30-60 days.
  • Creditors days should also be between 30-60
    days. LMs is very high. This could mean that LM
    is taking too long to may have a harmful effect
    on her cash flow.

Solutions to LMs efficiency
  • Develop a closer relationship with customers,
    suppliers and creditors.
  • Improve levels of stock control in the business.
  • Improve credit control, which will help improve
    its working capital.
  • Increase turnover using the same assets, so that
    assets work more effectively is a way to improve
    asset turnover.

You must also revise
  • Advantages and disadvantages of bank loan as a
    source of finance?
  • What additional sources of finance would you
    recommend for Les maisonettes?
  • Revise what a business plan and what should be
    included in it and why it is used?
  • You need to revise budgeting!!
  • You need to revise the meaning of all ratios and
    apply them to LM.
  • You need to learn and revise WORKING CAPITAL.